State of Kerala v. Cherian Varkey Construction Co. Pvt. Ltd. (OT Rev Nos. 38/2017 & 61/2017)

# **IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT** **THE HONOURABLE MR.JUSTICE S.V.BHATTI** **&** **THE HONOURABLE MR.JUSTICE BASANT BALAJI MONDAY, THE 28[TH] DAY OF FEBRUARY 2022 / 9TH PHALGUNA, 1943** **OT.REV NO. 38 OF 2017** **AGAINST THE ORDER/JUDGMENT IN OTHERS 516/2012 OF KERALA VAT** **APPELLATE TRIBUNAL, ERNAKULAM** ## **REVISION PETITIONER/S:** STATE OF KERALA REP. BY DEPUTY COMMISSIONER,(LAW), COMMERCIAL TAXES DEPARTMENT, ERNAKULAM BY ADV GOVERNMENT PLEADER ## **RESPONDENT/S:** M/S.CHERIAN VARKEY CONSTRUCTION CO.PVT. LTD. KADAVANTHRA, COCHIN-20 BY ADVS. SRI.P.J.ANILKUMAR SRI.A.KUMAR SMTG.MINI1748 SRI.P.S.SREE PRASAD THIS OTHER TAX REVISION (VAT) HAVING COME UP FOR ADMISSION ON 28.02.2022, ALONG WITH OT.Rev.61/2017, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: **O.T.(Rev.) No.38 & 61/2017** **-2-** **IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT THE HONOURABLE MR.JUSTICE S.V.BHATTI** **&** **THE HONOURABLE MR.JUSTICE BASANT BALAJI MONDAY, THE 28[TH] DAY OF FEBRUARY 2022 / 9TH PHALGUNA, 1943** **OT.REV NO. 61 OF 2017** **AGAINST THE ORDER/JUDGMENT IN TAVAT 687/2012 OF KERALA VAT** **APPELLATE TRIBUNAL, ERNAKULAM** ## **REVISION PETITIONER/S:** STATE OF KERALA REPRESENTED BY THE DEPUTY COMMISSIONER(LAW), COMMERCIAL TAXES, ERNAKULAM. BY ADV GOVERNMENT PLEADER ## **RESPONDENT/S:** M/S. CHERIAN VARKEY CONSTRUCTION CO.PVT.LTD KADAVANTHRA, COCHIN-20 BY ADVS. SRI.P.J.ANILKUMAR SRI.A.KUMAR SMTG.MINI1748 THIS OTHER TAX REVISION (VAT) HAVING COME UP FOR ADMISSION ON 28.02.2022, ALONG WITH OT.Rev.38/2017, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: **O.T.(Rev.) No.38 & 61/2017** **-3-** ## O R D E R [OT.Rev Nos.38/2017, 61/2017] S.V.Bhatti, J Revenue is the petitioner and the two revisions are directed against the common order dated 30.12.2015 in TA (VAT) Nos.516 and 687 of 2012 of the Kerala Value Added Tax Appellate Tribunal (for short 'the Tribunal'). M/s.Cherian Varkey Construction Company Pvt. Ltd, a registered dealer under the Kerala Value Added Tax Act, 2003 (for short, ‘the Act’) is the respondent. The parties, for convenience, are referred to as Revenue and the dealer. The subject matter of the revisions relates to the year 2007-08. The levy and demand of the penalty under Section 67(1) of the Act was questioned by the dealer. The circumstances relevant to the disposing of the revisions, in nutshell, are stated thus: 2. The dealer executes work contracts for and on behalf of the Central/State Governments and for private parties. The ## **O.T.(Rev.) No.38 & 61/2017** **-4-** dealer claims to have three activities of business _viz_ . construction of flats, villas under housing division; execution of the construction works for bridges, railway complexes, etc under construction division; and a ready mix concrete unit where the concrete mix is traded as a business commodity. The dealer under Section 21 of the Act filed return for the Assessment Year 2007-08. The dealer claims that the return, since is fully compliant in form and supported by Annexures, is deemed to have been completed with the receipt of the return by the Revenue. While the matter stood thus, the Intelligence Officer, Ernakulam Office of the Deputy CommissionerCommercial Taxes Department, firstly, issued summons in Form No. 22 dated 23.07.2010 calling upon the dealer to produce the books of accounts for the subject Assessment Year. The notice dated 23.07.2010 was followed by the notice dated 19.08.2010 under section 67(1) of the Act. The dealer filed a reply dated ## **O.T.(Rev.) No.38 & 61/2017** **-5-** 17.09.2010 to the notice dated 19.08.2010. The sentences, that classify the heads under which the penalty proceedings are issued, read thus: (1) In respect of the construction division the assessee has claimed certain deductions which are not allowable under Rule 10(2) (a) which is highly irregular. (defect No.1) (2) The dealer has not remitted tax on inter-State purchase of goods to the tune of Rs.78,35,206/- (defect No. 2) (3) The dealer has deducted input tax to the tune of Rs.81,34,715/-paid by them from the contract receipts to arrive at the taxable turnover, which is irregular. (defect No. (4) Claim of input tax on materials supplied by the awarder ISRO for an amount of Rs.4,02,940/- is not proved with bills and supporting documents. (defect No. 4) (5) In the housing division also the assessee has claimed deductions on certain expenses which are not allowable under Rule 10 (2) (a) of the KVAT Rules. (defect No. 5) ## 2.1 The Intelligence Officer through Annexure-A dated 18.11.2010 made the following order: Order No. IBE-IV/IR-49/OR-13/2010-11 dated 18-11-2010. **-6-** ## **O.T.(Rev.) No.38 & 61/2017** In exercise of powers vested upon me u/s. 67(1) of the KVAT Act 2003 an amount of Rs. 57,11,240/- (Rupees fifty seven lakhs eleven thousand two hundred and forty only) is imposed as penalty on M/s. Cherian Varkey Construction Company for the violation of Section 20(1) of the KVAT Act Read with 22(1) of the KVAT Rules & Section 40 of the Act Read with Rule 58 of the KVAT Rules 2005. The dealer aggrieved by the order in Annexure-A filed statutory appeal before the Deputy Commissioner (Appeals), Ernakulam, and _vide_ Annexure-B order dated 23.02.2012 the assessment order has been modified to the extent indicated in Annexure-B order. The extent to which it has been modified is not of much relevance, since the Revenue and the dealer, aggrieved by the order in Annexure-B, filed TA (VAT) Nos. 516 and 687 of 2012 before the Tribunal. The Tribunal, through Annexure-C order dated 31.08.2015, allowed the appeals filed by the dealer and dismissed the appeal filed by the Revenue. The learned Members of the Tribunal - Member (Department) and Member ## **O.T.(Rev.) No.38 & 61/2017** **-7-** (Accounts) - had delivered independent dissenting opinions and the learned Chairman agreed with the opinion of Member (Accounts) in Annexure-C order. Thus, the appeal filed by the dealer was allowed and the appeal filed by the Revenue was dismissed. Hence, revisions at the instance of the Revenue. 3. Heard Sr Government Pleader Mr V K Shamsudheen and Advocate Mr A Kumar for the parties. 4. Learned Senior Government Pleader Mr Shamsudheen argues that the Tribunal, through the orders impugned in the revisions, effaced the scope and purpose of Section 25 on one hand and Section 67 of the Act on other hand. The reassessment under Section 25 and the penalty proceedings under Section 67, in one sense, are independent and, in the case on hand, the Revenue initiated penalty proceedings in terms of Sec.67(1)(b) and (d), which reads as under; 4.1 Section 67 reads thus: **O.T.(Rev.) No.38 & 61/2017** **-8-** 67. Imposition of penalty by authorities.- (1) Notwithstanding anything contained in section 71 if any authority empowered under this Act is satisfied that any person, *** *** *** (b) has failed to keep true and complete accounts; or *** *** *** (d) has submitted an untrue, or, incorrect return; or” The Intelligence Officer enquired into the alleged erroneous claim of depreciation on plant, machinery, etc., excessive claim of the expenses, impermissible deduction towards sale in the course of inter-State trade, impermissible deduction of sales return and discount, issue of C-Form, and erroneous claim of input tax on materials supplied by the awarder. 4.2 We keep in our perspective the rival contentions made on behalf of the parties and for continuity, at this juncture, find it useful to paraphrase consideration of the Intelligence Officer on one of the items : Depreciation **O.T.(Rev.) No.38 & 61/2017** **-9-** In notes attached to Form 13 and 13A submitted for the year 2007-08 by M/s. Cheriyan Varkey Construction Co.Ltd., the defaulter himself stated that 'As per Section 9(2A) * (b) (iii) the hire charges (Interest) pertaining to loan on machinery consumption and depreciation on machinery are allowable as deduction from the total turnover. Hence the same are claimed as deduction. Rule partial(2A) Clauses a&b are omitted by SRO 385/07 published in GO (P) 105/07 with effect from 24-4-2007 and Rule 10(2)c) of the KVAT Rule which was inserted by KVAT Act (Amend)Rules 2007 vide SRO No.385/07 Rule 10(2) * (a) inserted with effect from 24-4-2007 does not permit deduction towards depreciation on machinery. The Rule was amended by the Government of Kerala by deleting certain entries already existed with clear purpose. Hence there is no ground for mere assumptions when there is clear rules provided. Hire charges are rent payable for taking machinery on hire whereas depreciation is facility for writing off the value of the machinery used in the work in a phased manner to cover up for wear and tear what is allowable as deduction is only outgoing in the nature of expenditure incurred by a Contractor Depreciation on the other hand is the allowance which a business men is entitled to in the computation of profit which writing off cost of the machinery on any early business to cover up for its wear and tear. Depreciation has a definite meaning **O.T.(Rev.) No.38 & 61/2017** **-10-** and content and its rates are varying both for the purpose of income tax and for proposing profit and loss account and balance sheet under the companies Act. Therefore if the legislature ever intended to provide for deduction of depreciation in the computation of taxable turnover on works contract, it would have been specifically provided. In the absence of any specific provisions in Rule 10(2) * (a) depreciation on machinery or tools is not eligible for any deduction in the computation of taxable turnover on works contract. The case cited in the reply as Annexure 1A Thampi & Co pertaining to 97-98 and has no relevance in the present VAT scenario and the above order was reversed by the Hon'ble High Court of Kerala (2010)(1GST 279) (KER). Decisions attached Annexure 1C pertains to Karnataka Sales Tax Rules and prior to amendment. From the above it is clear that the company has no legal right to claim depreciation as part of labour and service and the issue is not debatable as clear provision exists. ## 5. The Appellate Authority substantially confirmed the view taken by the Intelligence Officer. Hence, the view taken by the Appellate Authority is not adverted to for brevity on ## **O.T.(Rev.) No.38 & 61/2017** **-11-** introductory circumstances. The Member (Department) upheld the view taken by the Intelligence Officer and the Appellate Authority. The Member (Department) framed the following points for the decision. (1) Whether the imposition of penalty under Section 67 (1) of the Act by the Intelligence Officer for filing incorrect and untrue return is tenable. (2) Whether the irregular claim of the assessee towards expenses for arriving taxable turnover inspite of the notice from the Intelligence Officer amounts to an offence willfully committed to evade payment of tax legitimately due to state exchequer, warrants penalty under Section 67(1) of the KVAT Act. (3) Whether the purchase effected from outside the state for execution of a contract by availing concessional rate of tax by issuing C Form by the contractor is exempted from levy of tax under the KVAT Act. - 4) Whether the expenses claimed by the appellant towards labour and services are fully exempted from levy of tax as per rules. - (5) Claim of input tax credit on materials supplied by T.A. (VAT)Nos.516/2012 & the awarder is in order. **O.T.(Rev.) No.38 & 61/2017** **-12-** (6) Whether the input tax paid by the contractor is deductible from the contract receipt.” 5.1 For illustrative purpose, the mechanical consideration of the issues by the Member (Department) is adverted to at this stage of the matter. 5. Regarding Point No.1.On verification of the records it is seen that the Intelligence Officer had verified the return and accounts of the appellant and found that the assessee had irregularly claimed exemption from payment of tax by filing an incorrect and incomplete return, which is an offence punishable under the provisions of the Act. So he is competent to impose penalty on the appellant by virtue of powers confirmed upon him under the provisions of the KVAT Act. 6. Regarding Point No.II. The first appellate authority had observed that he find no reason to sustain the imposition of penalty. Therefore penalty cannot be imposed on the appellant for disallowance of claim of deduction, as labour and service charges and also towards disallowance of sale in the course of interstate trade, hence the penalty to that extent stands cancelled. This observation is challenged by the revenue. The KVAT rules clearly prescribes under Rule 10 2(a) the following. **O.T.(Rev.) No.38 & 61/2017** **-13-** 5.2 The Member (Accounts) dissented from the opinion expressed by the Member (Department) and has categorized the defects noted and findings recorded by the Intelligence Officer as follows: (1) In respect of the construction division the assessee has claimed certain deductions which are not allowable under Rule 10(2) (a) which is highly irregular (defect No.1) (2) The dealer has not remitted tax on inter-State purchase of goods to the tune of 78,35,206 (defect No. 2) (3) The dealer has deducted input tax to the tune of 81,34,715/paid by them from the contract receipts to arrive at the taxable turnover, which is irregular. (defect No. 3) (4) Claim of input tax on materials supplied by the awarder ISRO for an amount of 4,02,940/- is not proved with bills and supporting documents. (defect No. 4) (5) In the housing division also the assessee has claimed deductions on certain expenses which are not allowable under Rule 10 (2) (a) of the KVAT Rules. (defect No. 5) 5.3 The Member (Accounts) referred to the decisions in _U.K Monu Timbers Vs. State of Kerala_ **[1]** , _Smt. Khadeeja Makkar Vs._ 1 2012 (3) KHC 111 ## **O.T.(Rev.) No.38 & 61/2017** **-14-** _State of Kerala_[2] , _Kairali Steels & Alloys (P) Ltd, Palakkad Vs. Intelligence Officer_ **[3]** and tested the findings of the Intelligence Officer and the Appellate Authority whether it could be in due compliance with the scope, object, and purpose of Section 67 of the Act. The Member (Accounts) excerpted the recomputation /reassessment of the very details given by the dealer in his opinion and recorded the following conclusions: “In the present cases now before us, it is clear from a perusal of the order of the Intelligence Officer that she has recomputed the turnover after pointing out five defects and found that the differential tax payable by the assessee would work out 38,07,491/-. As stated earlier, the Intelligence Officer pointed out five/defects which we have already referred to earlier at Para 3 above/She then recomputed the taxable turnover as under: From the above, it is clear that the Intelligence Officer has stepped into the shoes of the assessing authority and recomputed the turnover. Admittedly, no concrete instance of any suppression of turnover has been detected. The Intelligence Officer has in fact accepted the total contract 2 (TA (VAT) Nos.201/2010,202/2010 and 335/2012 3 2015 (1) KHC 737 **O.T.(Rev.) No.38 & 61/2017** **-15-** receipt of 34,61,75,908/- conceded by the assessee. According to the Intelligence Officer, certain expenses claimed as deduction by the assessee were not allowable in terms of Rule 10 (2) (a) of the KVAT Rules. The dis-allowance made by the Intelligence Officer has been strongly disputed by the assessee. Similarly, the levy of tax on inter-State purchases of goods to the tune of 78,35,206/- has also has been disputed by the assessee. According to the assessee's learned Representative, the stand taken by the Intelligence Officer is against the dictum laid down by the Hon'ble Supreme Court of India and various High Courts. In our considered view, the stand taken by the Intelligence officer in estimating the suppressed turnover after recomputing the taxable turnover is against the dictum laid down by the Hon'ble High Court of Kerala in U.K. Monu Timbers' case as well as other subsequent cases referred to by us earlier. In fact a full bench of this Tribunal has, following the decision in UK. Monu Timbers' case held that the Intelligence Officer is not permitted to estimate the suppressed turnover after recomputing the turnover in respect of a contractor engaged in execution of work contract [ Sri. Mijulal P. Vs. State of Kerala - TA (VAT) 1356/2011 dated 20.03.2013]. Again a similar stand was taken by this Tribunal in the case of M/s. Pan Pacific Engg. Co. Vs. State of Kerala ITA (VAT) Nos. 738/2012 and 186/2013 dated 11/04/2014]. Adopting a consistent stand, **O.T.(Rev.) No.38 & 61/2017** **-16-** we are of the view that in these cases also, the Intelligence Officer is not justified in estimating the suppressed turnover by recomputing the taxable turnover and thereafter imposing a penalty under Section 67 (1) of the Act. In our considered opinion, the levy of penalty by the Intelligence Officer is therefore unsustainable in law. We set aside the orders of the authorities below. 9. Since we have found that the Intelligence Officer is not empowered to step into the shoes of the assessing authority and estimate the suppressed turnover by recomputing the taxable turnover, we are not entering into the merits of the contentions advanced by both sides with regard to the disallowance of claim of deductions under Rule 10 (2) (a) of the KVAT Rules as well as the levy of tax on inter State purchase of goods which are used in the execution of the works contract. It is for the assessing authority to consider these issues while completing the assessment for the relevant year. The assessing authority is at liberty to initiate penal proceedings against the assessee in terms of Section 67 of the Act if it is found that the assessee has willfully evaded payment of tax under the Act.” ## 5.4 The Chairman agreed with the opinion of the Member (Accounts) and recorded his independent conclusion. **O.T.(Rev.) No.38 & 61/2017** **-17-** 14. “…… when we will have a close consideration of the plea raised by the assessee/dealer before the authorities below it looks that the foremost contention raised by him before the first appellate authority was that the Intelligence Officer cannot estimate the suppressed turnover and it is left to the assessing authority alone who is empowered to resort a best judgment assessment and levy penalty if the dealer has contravened the provisions of the Act and Rules.” *** *** *** “It was their contention that the penalty was imposed on the appellant/dealer on the ground that he claimed certain deductions in the returns. According to the appellant/dealer the entire turnover has been declared by him in the return and the details of the deductions or exemption claimed were also being stated in the returns as well as in their audit report. In such a circumstance if it is a case of wrong claim of deduction for which the assessing officer alone can pass an assessment order of levying tax. The fact being so, at any rate the Intelligence Officer is not competent to impose the penalty on that score. When considering the aforesaid plea of the appellant / dealer before the first appellate authority and the dissenting order made by Sri. K. Venugopal and the order of the penalty disputed by the dealer, I hold that the assessee has made certain deductions in the taxable turnover and he **O.T.(Rev.) No.38 & 61/2017** **-18-** claimed exemption on it under a bonafide impression that those amount are not includable in the taxable turnover of them, and this impression was carried by the assessee in view of certain decisions which had been rendered by some High Courts as well as by the Hon'ble Supreme Court.” 15. In this circumstance it is relevant to see that the dealer has filed the returns as contemplated u/s. 21 of the Act relating to the return period in question and the self assessment has been deemed to have been completed on the receipt of such return. It is relevant to see that the Department has no such a case that the return filed by the dealer was not in the prescribed manner, or it was not accompanied by the prescribed documents. The facts being so, by virtue of Section 21 of the Act it can be said that the assessment is deemed to have been completed in all sense. Since the original assessment has been completed, even if the version of the Revenue is accepted for any purpose the assessment for turnover escaping assessment can only be possible by resorting Section 25 of the Act that can only be done u/s. 25 (3) of the Act. When we are having a close reading of the order of the penalty made by the Intelligence Officer a proceeding u/s. 25 of the Act can initiate only after the assessment is completed. In the instant case an assessment as contemplated u/s. 25 of the Act has not been initiated against the assessee /dealer by the assessing authority so far, **-19-** ## **O.T.(Rev.) No.38 & 61/2017** and even if the contention of the Revenue is taken as a whole on the ground on which the penalty was imposed, I hold that the penalty is possible in the instant case only u/s. 25 (3) of Act for non disclosure of turnover. At the same time a proceeding u/s. 25 (3) can be initiated after the assessment u/s. 25 (1) of the Act is completed which can only be done by the assessing authority. Therefore without any hesitation, it can be held that the proposal of penalty u/s. 67 (1) of the Act by the Intelligence Officer in the instant case was without any jurisdiction and any authority of law. (Emphasis supplied) 16. As I have stated earlier, on a close reading of the order of penalty made by the Intelligence Officer, it looks that the penalty was seen imposed on the ground that the assessee has claimed certain deductions which according to the Intelligence Officer was not in accordance with the provisions of the Act. But it is not the case of the Department that the dealer has ever made turnover suppression or he suppressed the details or particulars regarding the deductions either in the return filed on in the audit report. As I have stated earlier, if the dealer has made a wrong claim of deductions he can only be proceeded with an action u/s. 25 (3) of the Act. Since the original assessment of the appellant /dealer has been completed at any rate the Intelligence Officer lacks jurisdiction to impose a **O.T.(Rev.) No.38 & 61/2017** **-20-** penalty on a claim which has been accepted in the original assessment. 17. As I have stated earlier, Sri. G. Santhoshkumar, Member (Departmental) has approached the entire dispute involved in this appeal without considering the legal implications in applying Section 67 of the Act. I cannot agree with the view taken by him in the order for the reason that when we are having a close reading of Section 67 of the Act in its letter and spirit, no doubt it can be said that on misapplication of the effect of Section 67 of the Act Sri. G. Santhoshkumar has expressed a view in the order made by him that in the instant case imposition of the penalty on the appellant /dealer by the Intelligence Officer is perfectly a valid and justifiable one. At the same time when on a careful reading of the dissenting order made by Sri. K. Venugopal, Member (Accounts), I am constrained to adopt the view taken by him in the instance that Section 67 (1) of the Act had no application in the case on hand, because as stated earlier, the material on record will make it undoubtedly clear that the Intelligence Officer has recomputed the taxable turnover of the assessee /dealer based on the 5 defects as referred to in his order after having a scrutiny of the books of accounts of the dealer as well as the audit report in Form 13 and 13 A and considering the defects the total turnover, taxable turnover as well as the tax due etc. were **-21-** ## **O.T.(Rev.) No.38 & 61/2017** worked out by the Intelligence Officer in respect of the construction division, housing division as well as that of the manufacturing divisions of the assessee/dealer. *** *** *** 20. When considering the contra findings of Sri. K. Venugopal in the dissenting order, I am compelled to accept the view taken by him because in the instant case the penalty was imposed on the dealer solely on the ground that certain deductions claimed by him which according to the Intelligence Officer was not in conformity with the provisions of the Act. But it looks from the materials on record that the proposal to impose penalty was made by the Intelligence Officer on the scrutiny of the audit report as well as the annual return filed by the assessee/dealer. Whereas the Department has no such a case that the dealer has suppressed turnover pertaining to the assessment year. Since the original assessment has been completed by the Department I am constrained to concede with the findings of Sri. K. Venugopal that the Intelligence Officer has no jurisdiction to impose penalty on the assessee on a claim which has already been accepted in the original assessment. It look from the materials available on record that in the returns filed by the assessee dealer the entire facts now available was disclosed by him completion of the assessment, and exemption was allowed on the said basis as such there is no **O.T.(Rev.) No.38 & 61/2017** **-22-** meaning in holding that the returns filed by the assessee are untrue or incorrect. But anyway since the dealer has disclosed the facts now available on record and exemption was originally granted while completing the assessment, penalty cannot be levied for the wrong conclusion reached by the assessing authority. In such a circumstance I am constrained to accept the view expressed by Sri. K. Venugopal and hold that the Intelligence Officer was not justified in estimating the suppressed turnover by recomputing the taxable turnover and imposing a penalty on the assessee by invoking Section 67 (1) of the Act. Over and above, the levy of penalty by the Intelligence Officer is unsustainable in law. On the other hand, as stated earlier the reasoning in support of the findings arrived at by Sri. G. Santhoshkumar, Member (Departmental) in his order in my opinion is fallacious and it is based on misappreciation of the effect of Section 67 (1) of the Act. In the aforesaid circumstance, I fully concede with the observation made by Sri. K. Venugopal that there is no need to enter into the merits of the findings arrived at by the first appellate authority as well as the basis in the contention raised by the assessee as well as that of the Revenue.” 6. Learned Sr Government Pleader Mr Shamsudheen assailed the findings, particularly excerpted above, by arguing **O.T.(Rev.) No.38 & 61/2017** **-23-** that the Tribunal fell in error by completely effacing the distinction of reassessment under Section 25 of the Act on one hand and penalty proceedings under Section 67 of the Act on the other hand. It is no more _res integra_ that the proceedings under these two sections are independent and for invoking penalty proceedings reopening of assessment is not at all necessary. The basis for the majority view in the common order assailed in the revisions is substantially attributable to the reasoning that what has been done by the Intelligence Officer through order in Annexure-A could be or should have been substantially done under Section 25(3) of the Act. The requisite authority is conferred with the power to take action under Section 67 of the Act notwithstanding whether the assessment has been completed or not; the penalty proceedings are distinct and independent. The deficiencies noted by the Intelligence Officer, which are stated in the preceding paragraph of the **O.T.(Rev.) No.38 & 61/2017** **-24-** order, do constitute commissions and omissions under the Act. No exception to the imposition of penalty could have been taken by the Tribunal. The dealer is under obligation to maintain true and correct accounts and shall not also make false deductions. The order of the Intelligence Officer is not based on estimation but on the material available in the return and the books of accounts produced by the dealer. Therefore, the levy and the demand of penalty are justifiable. Stated briefly, the argument attempts to bring home the point that, the line of differentiation drawn by the majority view in the judgment impugned is set aside, the findings of fact recorded by the Intelligence Officer and Appellate Authority would survive, and the penalty becomes justifiable. 7. Learned Advocate Mr A Kumar appearing for the dealer states that the penalty proceedings being independent and separate are no more an issue and the arguments of the **O.T.(Rev.) No.38 & 61/2017** **-25-** Revenue on the ground that the Tribunal has effaced the distinction between Sections 25(3) and 67 is completely without merit. While accepting the position in law that the penalty proceedings are independent and separate from reassessment etc., he maintains that the Tribunal has interdicted the order of penalty on the ground that, while exercising the jurisdiction in penalty proceedings, reassessment has been done and penalty is imposed thereafter. Under Section 67 penalty is imposed for failure on the part of the dealer to carry out statutory obligation under the Act. The expressions 'untrue or incorrect return', 'failed to keep true and complete accounts'; use of these expressions by itself does not constitute failure of statutory obligation. 7.1 In the case on hand, it is argued with considerable vehemence that, the dealer has neither failed to keep true and complete accounts nor submitted an untrue or incorrect return. **O.T.(Rev.) No.38 & 61/2017** **-26-** The deducing of various heads of expenditure, depreciation, claim for input, etc are arrived at by the Intelligence Officer from the records submitted by the dealer and penalty is imposed. The said exercise is nothing but reassessment. The dealer is justified in making a claim for exemption, the disallowance of the said claim does not constitute failure of _per se_ statutory obligation. At best, it is a case falling under Section 25(3) of the Act. There is no intention to evade or avoid the tax. It is one thing to levy penalty and altogether a different situation where reassessment is undertaken, claims are independently considered, rejected, and to the extent of the rejected portion, the Intelligence Officer treated it as untrue and incorrect submission of accounts. The subtle difference in the scheme of things; on one hand, Sections 21, 22, 24 and 25, on the other hand, Section 67, has not been properly appreciated. a The penalty is _quasi-criminal_ proceeding and shall not be ## **O.T.(Rev.) No.38 & 61/2017** **-27-** ordinarily imposed unless the commission or omission is flagrant. To emphasize the argument that through reassessment, turnover is redetermined, upon re-determination penalty is imposed, he has invited our attention to the very portion of the order of Intelligence Officer which is excerpted above. 7.2 He argues that the Chairman has not only given the reasons why he is disagreeing with the view taken by the Member (Department) and has given independent reasoning for accepting the view of the Member. The Revenue unless and until demonstrates before this Court that there is no reassessment and that the commission or omission now pointed out in the penalty order is an independent discovery by the Revenue during and in the course of any of the situations contemplated under the Act, the levy of penalty more is in the nature of persecution and does not commensurate with the **O.T.(Rev.) No.38 & 61/2017** **-28-** scope of Section 25(3) of the Act. He prays for dismissing the revisions. 8. We have carefully perused the record and noted the submissions of the learned counsel appearing for the parties. 8.1 From the material on record, whether before the Intelligence Officer or this Court, it can be stated that the dealer filed the return along with Annexures under Section 21 of the Act. The return is deemed to have been assessed under Section 21 of the Act. The deemed assessment, however, is subject to the provisions in Sections 22,24 and 25 of the Act. 8.2 Section 21(1) reads thus: “21. Self assessment.- (1) Where the return submitted under sub-section (1) of section 20 is in the prescribed manner and accompanied by the prescribed documents, the assessment relating to the return period shall, subject to the provisions of sections 22, 24 and section 25, be deemed to have been completed on the receipt of such return.” **-29-** ## **O.T.(Rev.) No.38 & 61/2017** The case on hand does not come under Sections 22 or 24 of the Act. Section 25(1) and (3) which are relevant for our purpose are excerpted hereunder: “25. Assessment of escaped turnover.- (1) Where for any reason the whole or any part of the turnover of business of a dealer has escaped assessment to tax in any year or return period or has been under assessed or has been assessed at a rate lower than the rate at which it is assessable or any deduction has been wrongly made there from, or where any input tax or special rebate credit has been wrongly availed of, the Assessing Authority may, at any time within five years from the last date of the year to which the return relates, proceed to determine, to the best of its judgment, the turnover which has escaped assessment to tax or has been under assessed or has been assessed at a rate lower than the rate at which it is assessable or the deduction in respect of which has been wrongly made or input tax or special rebate credit that has been wrongly availed of and assess the tax payable on such turnover or disallow the input tax or special rebate credit wrongly availed of, after issuing a notice on the dealer and after making such enquiry as it may consider necessary: Provided that before making an assessment under this subsection the dealer shall be given a reasonable opportunity of **O.T.(Rev.) No.38 & 61/2017** **-30-** being heard. Provided further that where the escapement is due to the application of incorrect rate of tax, no assessment under this subsection shall be made where the dealer files revised return and pays the tax which has escaped assessment along with interest under sub-section (5) of section 31 and thrice the interest as settlement fee. Provided also that the period for the completion of assessments including those subjected to extension under section 25B which expires on 31st March, 2015, shall be extended up to 31st March, 2016. *** *** *** (3) In making an7 assessment under sub-section (1), the Assessing Authority may, if it is satisfied that the escape from assessment is due to wilful non-disclosure of assessable turnover by the dealer, direct the dealer to pay, in addition to the tax assessed under sub-section (1), a penalty as provided in [section 67]: Provided that no such penalty shall be imposed unless the dealer affected has had a reasonable opportunity of showing cause against such imposition. Explanation. For the purposes of this section, the burden of proving that the escape from assessment was not due to wilful non-disclosure of assessable turnover by the dealer shall be on **-31-** ## **O.T.(Rev.) No.38 & 61/2017** the dealer.” 8.3 Admittedly, the Revenue did not set in motion reassessment of alleged escaped turnover to tax under any of the heads falling within the scope of Section 25(1). It is fairly well established that the reassessment proceedings under Section 25 are independent. The penalty proceedings are separate. Firstly, the Tribunal has not assumed that the proceeding under Section 67 either is independent or has got to do anything with the assessment under Section 25 of the Act. Even if any observation is made to that effect in the common order, we hold and clarify that the proceedings under Section 67 of the Act are independent and separate. 8.4 Having held so, the discussion takes us to the next point whether the levy of penalty in the case on hand is on account of a commission or omission covered by Section 67 of **-32-** **O.T.(Rev.) No.38 & 61/2017** the Act _per se_ or the commission or omission is held as having been committed upon reassessment. It is not the optics through which the distinction is appreciated. The distinction, in these two circumstances, is very subtle and the best litmus test is juxtaposing the very consideration of the issue by the Intelligence Officer for imposing the penalty. We have excerpted a few portions from the order of the Intelligence Officer. We have independently, with the assistance of the counsel appearing for the parties, appreciated under each one of the heads, the penalty is imposed. Without much deliberation it could be stated that deduction claimed by the dealer is disallowed, input tax claimed by the dealer is disallowed, incurring of expenses is disallowed. Upon disallowing these items it has been held the accounts are untrue and incorrect. In the entire process undertaken by the Intelligence Officer, to us, sounds that reassessment of return **O.T.(Rev.) No.38 & 61/2017** **-33-** has been done under Section 67, upon disallowing the claims the penalty is imposed. 9. Let us refer to often cited one of the earliest judgments on the nature and scope of penalty in _Hindustan Steel Ltd. Vs. State of Orissa_[4] , where it has been held thus: “7. Under the Act penalty may be imposed for failure to register as a dealer: Section 9(1) read with Section 25(1)(a) of the Act. But the liability to pay penalty does not arise merely upon proof of default in registering as a dealer. An Order imposing penalty for failure to carry out a statutory obligation is the result of a quasi-criminal proceeding, and penalty will not ordinarily be imposed unless the party obliged either acted deliberately in defiance of law or was guilty of conduct contumacious or dishonest, or acted in conscious disregard of its obligation. Penalty will not also be imposed merely because it is lawful to do so. Whether penalty should be imposed for failure to perform a statutory obligation is a matter of discretion of the authority to be exercised judicially and on a consideration of all the relevant circumstances. Even if a minimum penalty is prescribed, the authority competent to impose the penalty will be justified in refusing to impose 4 AIR1970 SC 253 **-34-** ## **O.T.(Rev.) No.38 & 61/2017** penalty, when there is a technical or venial breach of the provisions of the Act or where the breach flows from a bona fide belief that the offender is not liable to act in the manner prescribed by the statute. Those in charge of the affairs of the Company in failing to register the Company as a dealer acted in the honest and genuine belief that the Company was not a dealer. Granting that they erred, no case for imposing penalty was made out.” (Emphasis supplied) 9.1 In _Deputy Commissioner of Commercial Taxes, Trichy Division, Trichy v. V.R. Kuppusamy Gounder_[5] it has been held as follows: “15. Revenue relied upon a decision rendered by this Court in T.C. Nos. 995 to 998 of 1991 dated October 28, 1991 (Janatha Paint Industries v. State of Tamil Nadu, represented by Deputy Commercial Tax Officer, Moore Market, South Circle, Madras) in order to support their contention in the appeal that the revised assessment made by the assessing officer were correct and the penalty levied under section 16(2) of the Act is sustainable. According to the facts arising in the above said decision, it was established that the traders were only doing bill trading and the assessees failed to establish that the earlier 5 (1995) 98 SCC 408 **O.T.(Rev.) No.38 & 61/2017** **-35-** sales have been taxed. On facts in that case it was held that reopening of the assessment under section 16(2) of the Act was in order and penalty levied under section 16(2) of the Act is exigible. This decision was rendered on the facts arising in that case. But, on facts in the present case, the assessees have established that the groundnuts purchased by them from the sellers are genuine and the department has no evidence to show that the sellers are not in existence and the bills issued by them are bogus. Therefore the above said decision will not be applicable to the facts of this case. Therefore, the order passed by the Tribunal in deleting the penalty levied against all the assessees is sustainable. Accordingly, the Tribunal was correct in holding that all the appeals are allowable and the enhancement petitions in all the appeals filed by the Revenue are dismissed. In the result, the revisions filed by the State are dismissed. No costs.” (Emphasis supplied) ## 9.2 The view taken by the Supreme Court in _Sree Krishna Electricals vs. State of Tamil Nadu_[6] , reads thus: “We find that the authorities have factually adjudicated the issues. In S. Durai's case [1994] 95 STC 372 (Mad) on which reliance was placed by the High Court to dismiss the writ petitions it was held that what was sold was in fact a complete 6 (2009) 23 VST 249 (SC) **O.T.(Rev.) No.38 & 61/2017** **-36-** wet grinder which was a new commodity and not merely parts thereof. The High Court has observed that the factual scenario was identical. The conclusions arrived at by the Revenue authorities and the High Court were that what was sold was a complete wet grinder which was a new commodity and not merely parts thereof. This being a factual finding, there is no scope for interference in these appeals so far levy of tax is concerned. So far as the question of penalty is concerned the items which were not included in the turnover were found incorporated in the appellant's account books. Where certain items which are not included in the turnover are disclosed in the dealer's own account books and the assessing authorities includes these items in the dealers' turnover disallowing the exemption, penalty cannot be imposed. The penalty levied stands set aside. The appeals are accordingly disposed of.” 9.3 In an unreported judgment in _M/s. Chakkiath Brothers_ _v. The Assistant Commissioner_[7] a learned Single Judge held as follows: 8. In almost similar circumstances the Honourable Supreme Court in Cement Marketing Co. of India Ltd.(supra), held that if 7 Judgment dated 16.06.2014 in W.P.(C) No.11696/2013 **O.T.(Rev.) No.38 & 61/2017** **-37-** the assessee does not include a particular item to tax under a bona fide belief that he is not liable so to include it, the return filed cannot be condemned as a 'false' one which finding alone would invite imposition of penalty. What then, is the scope of a penalty proceeding, is this Courts concern, herein. In that case the assessee deducted the freight charges from the price shown in the invoice since the invoice showed the 'free on rail destination railway station' price. The amount of freight paid to the assessee, according to them, was not exigible to sales tax and hence was not included in the taxable turn over, in the returns filed. Despite the finding that freight formed part of the sale price, on facts, it was held that “imposition of penalty is penal in character and unless the filing of an inaccurate return is accompanied by a guilty mind, the Section cannot be invoked for imposing penalty” (sic). The principle was reiterated in E.I.D Parry (1) Ltd v. Assistant Commissioner of Commercial Taxes [ 2000 (2) SCC 321 ]. 9. On point is the decision of the Honourable Supreme Court in Sree Krishna Electricals v. State of Tamil Nadu and Another (2009 (11) SCC 687), paragraph 7 of which is extracted hereunder:- “So far as the question of penalty is concerned the items which were not included in the turnover were found incorporated in the appellant's accounts books. **-38-** ## **O.T.(Rev.) No.38 & 61/2017** Where certain items which are not included in the turnover are disclosed in the dealer's own account books and the assessing authorities includes these items in the dealers' turnover disallowing the exemption penalty cannot be imposed. The penalty levied stands set aside”. 10. On the strength of the above binding precedents and on the fairly neat facts stated above, this Court finds that no penalty proceedings can be initiated in the aforesaid case on the basis of a mere dispute in classification; which, as noticed above, according to the assessee, the Assessing Authority and the Intelligence Officer are under three different entries. Such a debatable issue definitely cannot lead to a presumption of any contumacious conduct on the part of the assessee or a finding of attempt to evade tax. The assessee has made a claim, in turn, which can be rejected or accepted in assessment proceedings. Even on rejection, sufficient grounds do not exist for attracting penalty (Emphasis supplied) 11. ..... In the present case, though there is no ground of violation of principles of natural justice, definitely, the Intelligence Officer has proceeded without jurisdiction and a penalty imposed under Section 67 of the KVAT Act, on the facts and law stated above, would definitely be a patently illegal **-39-** ## **O.T.(Rev.) No.38 & 61/2017** proceeding. Exts. P13 and P14 are hence, set aside. However, clarifying at the this Court has not risk of repetition, gone into that, the issue of classification at all, which is best left to the Assessing Officer. Writ petition allowed.” ## 9.4 In _A Kamarudeen v. Assistant Commissioner (Assmt.)_[8] it is held thus: “10. However, all the facts which I have stated earlier has got an impact in regard to the quantum of penalty to be imposed for these two years. Petitioner was under the bona fide impression that the transactions as explained by him were not exigible to tax under the Act or that he was not obliged to take registration under the Act. In the absence of materials other than the statement given by the petitioner and in the absence of an enquiry conducted by the assessing authority independently about the transactions of the petitioner and in view of the further fact that the authorities have not taken care to make the assessment under the Act on the disputed transactions, the circumstances warrant a lenient view to be taken in the matter. It is not as if a quantification of the evasion is not possible, but under Section 45A of the Act a discretion is given to the authority to impose a penalty up to twice the tax 8 (2007) 7 VST 51 (Ker.) **O.T.(Rev.) No.38 & 61/2017** **-40-** sought to be evaded. Keeping in mind the principles laid down by the Supreme Court in Hindustan Steel Ltd. v. State of Orissa [1970] 25 STC 211 and by a division Bench of this court in P.D. Sudhi v. Intelligence Officer, Agricultural Income Tax and Sales Tax, Mattancherry [1992] 85 STC 337 (Ker), I am of the view that the penalty imposed by the first revisional authority and sustained by the Board of Revenue requires modification. In the circumstances of the case, the penalty imposed for the years 1987-88 and 1988-89 is reduced to Rs. 10,000 and Rs. 20,000, respectively. Orders passed by the authorities are modified as above.” ## 9.5 In _Vikash Rexine House v. State of M.P._[9] it was held thus: “9. From the aforesaid judgments of the Court, it is clear that the penalty could be imposed when the party obliged either acted deliberately in defiance of law or was guilty of conduct contumacious or dishonest, or acted in conscious disregard of its obligation. 10. In the present case, the petitioner submitted the return and thereafter the assessment order was passed. The authority accepted the return and imposed tax at particular rate. Subsequently, it was found by the auditor that the petitioner was liable to be assessed @ 12.5% on sale of certain product. In 9 (2014) 72 VST 420 (MP) **O.T.(Rev.) No.38 & 61/2017** **-41-** that circumstances, it could not be held that the petitioner acted deliberately in defiance of law or guilty of conduct contumacious or dishonest, or acted in conscious disregard of its obligation. In such circumstances, imposition of penalty is against the law.” 10. In our appreciation of the commissions and omissions and the reply of the dealer it is sufficiently clear that the claim for exemption is denied, input tax credit claimed is denied, deduction under different heads of expenses is refused, and depreciation is denied as not having been made in compliance with the requirements of law. These are substantially matters arising in reassessment. One could never ignore the subtle meaning for the words ' return', 'assessment', 'deemed assessment', 'audit objection', 'reassessment', 'settlement fees', 'penalty', etc, used in different sections in the Act. To acquaint ourselves with what exactly was carried out by the Intelligence Officer, we have perused the consideration **O.T.(Rev.) No.38 & 61/2017** **-42-** and findings recorded under all the five heads under which penalty has been levied. The approach as pointed out by the Tribunal resembles reassessement. Having observed as above, we hasten to explain that the enquiry reveals, claim of false/fictitious input tax, deductions of expenditure, not _bona fide_ from any stand point, then the incorrect account etc, can warrant penal action. The heads are the consideration do fall within the ambit of reassessment and these commissions or omissions would not go so far to record a findings that the dealer acted deliberately in defiance of law or was guilty of conduct contumacious or dishonest or acted in conscious disregard of dealers objection under the Act. The majority view of the Tribunal has properly appreciated the controversy in fact between the parties and has correctly recorded a finding that the reassessment resulting in dis-allowance of a few claims constituted the penalty, and the proceedings under Section 67 ## **O.T.(Rev.) No.38 & 61/2017** **-43-** as illegal and without jurisdiction. To put it succinctly, it is not for an established commission or omission the penalty proceedings are initiated in the case on hand, but penalty is levied in the course of reassessment and upon excluding the claims, allowances put forward by the dealer. The finding of fact recorded by the Tribunal does not warrant interference and we concur with the same. The revisions are without merit, fail, and accordingly dismissed. No order as to costs. Sd/S.V.BHATTI JUDGE Sd/BASANT BALAJI JUDGE JS/jjj **-44-** ## **O.T.(Rev.) No.38 & 61/2017** ## **APPENDIX OF OT.REV 38/2017** PETITIONER'S ANNEXURES ANNEXURE A A TRUE COPY OF PENALTY ORDER NO IBE-IV/IR-49/OR13/2010-11 DATED 18.11.2010 PASSED BY THE INTELLIGENCE OFFICER (IB) ERNAKULAM, OFFICE OF THE DEPUTY COMMISSIONER (INT) COMMERCIAL TAXES, ERNAKULAM AT EDAPPALLY. ANNEXURE B A TRUE COPY OF THE ORDER DATED 23.2.2012 IN KVATA NO 4219 OF 2010 ANNEXURE C CERTIFIED COPY OF THE COMMON ORDERS OF THE TRIBUNAL IN TA (VAT) NO 516 OF 2012 DATED 30.12.2015 **-45-** ## **O.T.(Rev.) No.38 & 61/2017** ## **APPENDIX OF OT.REV 61/2017** PETITIONER'S ANNEXURES ANNEXURE A A TRUE COPY OF PENALTY ORDER NO IBE-IV/IR-49/OR13/2010-11 DATED 18.11.2010 PASSED BY THE INTELLIGENCE OFFICER (B) ERNAKULAM OFFICE OF THE DEPUTY COMMISSIONER (INT). ANNEXURE B A TRUE COPY OF THE ORDER DATED 23.2.2012 IN KVATA NO 4219 OF 2010 ANNEXURE C PHOTO COPY OF THE COMMON ORDERS OF THE TRIBUNAL IN TA (VAT) NO 687 OF 2012 DATED 30.12.2015